CSPs Bank on Virtualization in M&A Flurry

Virtualized networks are not only reshaping communication service providers' infrastructure, they're also restructuring entire corporations via a flurry of CSP mergers and acquisitions fueled, in large part, by a desire to acquire talent and accelerate internal and customer digital transformations.

In fact, 48% of 107 senior leaders from telecommunications companies around the globe say they are actively pursuing a merger or acquisition in the next 12 months, up from 43% six months ago, according to Ernst & Young's 15th biannual Telecommunications Global Capital Confidence Barometer (CCB). And 37% currently have five or more deals in the pipeline, the study says.

While some deals -- such as the pending AT&T acquisition of Time Warner Cable -- focus on operators' move into content, not all service providers have the money or confidence to enter such a new, potentially uncomfortable market. (See Gaming the AT&T-TW Deal .)

Perhaps, then, it's unsurprising that 49% of deals are valued at $250 million or less,
Ernst & Young International finds, and some of these purchases extend into developers of tools for operational savings, network efficiencies and virtualization capabilities.

"I'll go back to a conversation I had with a [CSP's] corporate development officer in the Middle East who commented that a year ago, probably 18 months ago now, he was the hero in the company because he had gone to a conference and met with a bunch of content entrepreneurs who were developing new and innovative solutions, and he had brought these people to the company to meet with the CEO and everybody was excited about it; this was sexy, there was a lot of buzz," says Gaeron McClure, EY Global Telecommunications leader at Transaction Advisory Services, in an interview.

"But by the time I was meeting with him a year later, he said the hero in the company was the guy in operations who was going to save 5 cents per user on cash operating costs. People have grown, in a very short period of time, very skeptical of transformative transactions," McClure adds. "It's not that they didn't believe there wasn't digital disruption, but because from a governance perspective they weren't convinced of what the appropriate response was."

Telcos got talent
When it comes to reasons for looking outside their sector for acquisitions or mergers, finding new talent is the most or second-most important for 71% of respondents, according to EY's CCB report. Yet 67% say they must move around internal skillsets and talent to gain efficiencies from improved automation investments -- and 29% of CSPs versus one-fourth of all business executives worldwide -- say they continue to duplicate automated and manual processes.

This year, 75% of carriers have deployed or stated their intention to deploy software-defined networks, according to IHS Markit, an investment they're making as part of a move to automate and transform networks, operations and internal processes, says Michael Howard, senior research director at the firm.

Therefore, in addition to DevOps, virtualization and SDN professionals, service providers also seek -- through mergers, acquisitions and partnerships -- talent who can built on their existing infrastructures and revenue sources while creating new streams of cloud-based services, says EY's McClure.

"Their capex investment cycles keep getting shorter and shorter. You've got more and more technology, more and more network investment. A lot of money going into these networks and I think a lot of carriers are very concerned about losing the contact with customers that enables them to monetize that network. They want to make sure they own the customer relationship," he says. "They're not all doing the same thing. There isn't one playbook here. There are about as many different playbooks as there are different companies."